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Heartland Bank saw a 43% rise in reverse mortgage loan repayments in the past year as customers took advantage of the roaring house market to sell up and pocket gains

Heartland Bank saw a 43% rise in reverse mortgage loan repayments in the past year as customers took advantage of the roaring house market to sell up and pocket gains

Heartland Bank saw a 43% rise in reverse mortgage repayments in New Zealand during the past financial year as its customers took advantage of the steaming house market to sell up and reap cash returns on their properties.

But despite seeing what it described as "elevated" repayments, ($93 million worth) Heartland had a record year for new reverse mortgage business in New Zealand ($102 million, which was over 30% higher than the previous year). It increased the size of its reverse mortgage receivables here by 7.4% to $602 million, with NZ reverse mortgage net operating income rising 3.6% to $24.4 million.

Heartland Bank's parent company Heartland Group Holdings announced an after-tax profit of $87 million for the June 2021 year, up nearly 21% on the previous year after a very strong second half. The group is targeting full year earnings for 2022 of $93 million to $96 million.

Heartland Bank chief executive Chris Flood said the elevated level of reverse mortgage repayments in NZ was "a product of our older borrowers taking the opportunity to sell their properties at levels or prices that two or three years ago they thought wouldn’t be achievable".

"It then gives them greater options to finance their next stage of their retirement in a different way either through entry into a village or into a smaller but better quality location outside of where their original home was," he said.

“It’s happened in Australia as well, but not quite to the same extent that we experienced here in New Zealand."

So, is the level of NZ repayments a concern or problem?

“No, I don’t think so - 7.4% growth is still very solid and the pipeline is continuing to build," Flood said.

"...The baby boomer cohort is really starting to move now into an area where we will be of interest to them. That ranges from 57-75 - obviously a population bubble - and our average customer comes in at 72.

A solid pipeline

"So, we think there’s going to be a real solid pipeline of potential borrowers who are asset rich and cash poor - and particularly given house price inflation over recent years, will want to access some of that equity and live a better quality retirement. So we are really excited about the product," Flood said.

In terms of reverse mortgage business ahead, Flood said Heartland had "record level pipelines".

"The last three months had been at highs for us in terms of new lending...This lockdown will slow things."

During the level 4 lockdown last year, Flood said Heartland had observed that the normal regular monthly drawdowns by reverse mortgage customers had reduced as they were not able to spend. Execution of new loans had slowed down. And getting valuations had presented problems.

“But what we have noticed - and it’s only been a week - is the actual level of inquiry and the number of phone calls or packs that we are sending out to customers to give them more information hasn’t really reduced in this lockdown.”

Heartland is putting a lot of emphasis on development of its digital platform. And it is now using this to selectively target the ordinary mortgage market. It has been aggressive in cutting interest rates this year. Specifically, it is keen on the refinancing business, where it is targeting loans below 80% loan-to-value ratio that can easily be done online.

Flood says about $5 billion of the $9 billion of loan refinancing that occurs each month would fit into the type of loan targeted by Heartland.

“I’m really excited about it. As the CEO of a small bank here in New Zealand to be offering the rates that we are relative to the rest of the market, it is not something that I expected to be able to do three or four years ago and it is really the development of our digital platforms that have given us the opportunity to do that.

"So when we first launched we had a philosophy around operating in areas where we could be 'best or only' - so, clearly reverse mortgages and motor were two areas where we put a lot of attention in. We grew our asset finance book as well. And we are really seeing that start to grow at quite a clip. I think that has good prospects for the year ahead. But now what we are seeing is we can not just have the best or only product but potentially the best delivery platform."

In terms of the $5 billion worth of mortgages that refinance every month that Heartland "would be interested in", Flood said they "only need a small percentage" of those customers to value an online proposition, "that’s frictionless that takes a lot less time that doesn’t require them to move all their facilities from one bank to another but simply rather get the home loan that they want at the rate they want it easily and efficiently".

Heavy lifting

“...Technology, or the borrower, does most of the heavy lifting. We are digitalising the back end of our platforms now so we had a focus of building a front end that made it easy for a customer to come to us and be approved - but we did have manual processes across the business that we had to employ staff for - that’s now been replaced by technology and end to end processes. So quite an exciting proposition.

"...So, we only need a small number of that $5 billion - bearing in mind Heartland’s a $5 billion-bank - to value that proposition for it to be meaningful to us."

Flood said the bank was "seeing a lot of inquiry" and has approved "hundreds of millions of dollars" of new loans.

"...What we are seeing is two things: Our pipeline of approved and client accepted facilities increase - and then the amount of monthly draw that we increase. Before this lockdown we were expecting drawings of around $16 million to $17 million. It was $12 million to $13 million the month prior and our pipeline indicated that next month would be higher again. So, we shall just have to see how that pans out in terms of a level four lockdown across the country. But the signs are all very positive."

Late last year Heartland revealed that it was mulling the possibility of pulling out its motor vehicle financing business as a separate arm. 

Asked about whether that was still under consideration, Flood said: “There’s no decisions been made to do that.

'Can split out the motor vehicle business if we want'

"But what we have done is we are setting up the business in a way that we can split it out if we choose to.

"That means creating stand alone systems and dedicated staff and one of the advantages I guess Heartland has always had is that we have been very narrow in our proposition, so we have people that are very good at selling motor vehicle loans to motor vehicle dealers, we have people who are very good at selling reverse mortgages to reverse mortgage borrowers and the same with our asset finance and our livestock finance propositions by way of example.

“So, having a dedicated resource in certain areas is something we actually started with now we are making sure we have stand alone systems and can operate in that way - should we decide to."

In terms of the overall result the Heartland group produced for the June 2021 year, Flood said “it was a very good second half for Heartland".

"We have continued to build on that and obviously we are focused on growth in terms of profitability and in terms of ROE [return on equity] and in terms of, clearly, balance sheet.

"...So, that sort of continued boring trend that Heartland rolls out, which is 10% growth across the board, is rolling on again to next year."

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22 Comments

em .. given the amount debt we have to collectively own due to the lockdown, and the excessive untaxable profits earned by the boomers, I thereby announce that the boomers have two choices of either forgoing their superannuation forever or accept to be taxed at the highest rate on the enormous profits earned from selling their properties.

Period.

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Means test the pension?

That'll win you votes.

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Sure lets hack everyone down to the lowest level and just give them something RED to wear.

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Communism becomes attractive when you're locked out of opportunity in a capitalist society.
And that's where we're headed. If you don't have equity, you're locked out. And those who are in the club will repeat ad nauseum that it's all about hard work. Which I'll believe, when banks make you pay for property with money earned through work, rather than preferring leveraged equity. No one works hard enough to 'earn' 10 houses when a lifetime's wages barely pay for one. Communism is inefficient, illiberal, and usually fails, but at least it doesn't put a cloak of self-righteousness over greed and misanthropy like our property cult does.

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It doesn't need to be communism Brisket, just a centralist view that all the population need to benefit not just a few. Communism is too extreme left. Proper market regulation, and thinking about a discussion with Nymad yesterday, tax may play a part., is what is required. My problem is clumsy solutions such as a CGT will just make it harder for low income young to get a start. I feel that we shouldn't be looking at properties as a future income stream, but as homes. And that view hasn't been seen since the early 80's.

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Great post

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The calculation for just what the profit is would be quite complex for some of the properties, especially the longer held ones, because it would be for the full value at which the property is sold.

The other aspect of this is those profits are actually a function of the market, and my understanding is that they only become taxable if it can be shown that the property was bought for the purpose of making that profit. So for some of the properties where they have been held for quite a long time this might not be the case.

The problem here is not the untaxed profits, but a multitude of Governments who have failed in their responsibilities to regulate the market, and now have little to no idea of how to fix it and lacke the courage anyway.

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would you still have an enormous profit after paying a reverse mortgage at 6% compounding plus all their fees?

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Headlines optimized to get clicks. Modern media at its finest.

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Sorry kids, no more inheritance...

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And welcome to the majority of the populations reality

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I don't really understand the reverse mortgage. Is it not a better idea to sell and get something smaller and pocket the balance ? You know a retirement village, an apartment even some of the 2 bed places they are still building. Smaller and easier to clean, no gardens to upkeep or grass to mow giving you all the time available to use in those later years. Essentially I have already done that at age 54 and if I didn't still have so much "Hobby" stuff or "Toys" then it could have been an even smaller house.

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Totally agree, the rates charged on reverse mortgages are horrendous.

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My understanding is that a reverse mortgage is about being able to remain in the property when you've no longer got an income stream to cover the costs, or your lifestyle. Not as the article suggests, use it to leap now.

I see it as a big bet by both sides. The bank in this article are betting on house prices staying up regardless, and the owners are betting they're going to die before the money stream runs out. For the owners, I understand that the mortgage will be for a specified term, at which you're no longer the owner. So irrespective of your reserves you either start paying rent or have to move, if you're not dead. Good luck on that.

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This article reads like an advertisement for Heartland Banks reverse mortgage scheme. Were Interest.co paid to publish this I wonder.

Such growth in reverse mortgages is really concerning. This is something you should only do as a last resort and no savvy investor would do this. It's also only something that those with a single property would do. Many of us here have purchased additional properties to either sell upon retirement or to use the rental income.

Why would you want to increase the profits of the banks? Where did that 87 million come from? Some from people taking out reverse mortgages of course.

Obviously owning your own home and getting superannuation is not going to be enough for your retirement and people need to look at options like a rental property or a share portfolio or something so they don't need to fall victim to something like this.

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Depends on what you want to do. Currently Super is paying out more per week than my current income. I'm basically in cruise control until I hit retirement age now. Sure you cannot do a world cruise on it every year but it more than pays the bills if your a practical person.

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Sure, I'd probably be the same and quite enjoy that lifestyle. They keep making me work unfortunately. The thing is the reverse mortgage should be a 'last resort' which means that it isn't great. Like a scorched earth policy.

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"During the level 4 lockdown last year... customers had reduced as they were not able to spend."

So boomers are contributing heaps to the economy.

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We should have a dob a speculator in hotline. Its easy to see what sellers paid for stuff in the last five years. Would be good to be able to call in the speculators full name, legal details etc to ensure the pay their tax. If you got 5% of the money for doing so I would make this a roaring success.

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As a few other informed commenters say reverse mortgages are at a much higher interest rate. I knew a lovely old lady who had one. Single all of her life. Just could not afford to live her modest life style on what the government paid her so she figured with no children to leave her money to she may as well be able to see out her last days without running up huge debt. I had the feeling she was being exploited. Not the sort of product a respectable big bank should crow about.

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She would have been a lot less exploited by a reverse mortgage than by a retirement home.

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Until you find out the fact that 2 out of every 3 people are not paying for it, the government is. Clearly people are hiding their property in a trust or putting it in their kids names some 7 years before needing to go into a home. With home ownership at at least 60% the numbers not paying in rest homes doesn't stack up. What I ended up doing is selling my dads place and putting the money in a TD and that covered the rest home. The problem is now the interest rates are like 1.2% and not 4.8% so your screwed in trying to maintain the original investment.

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